Boeing Partnership And Cutting-Edge Aerospace Innovations Set To Propel Company's Growth

Key Takeaways

• Woodward's collaboration with Boeing on advanced hydraulic controls for the X-66 project is likely to boost future aerospace tech revenue.
  
• Investments in R&D for high-temperature components and alternative fuel technologies position Woodward as a leader in sustainable energy and aerospace markets.
  
• External factors like supply chain disruptions and market volatilities across aerospace, defense, and on-highway sectors pose significant risks to cash flow, revenue, and margins.

Catalysts

Designs, manufactures, and services control solutions for the aerospace and industrial markets worldwide.

• The selection of Woodward by Boeing to design and manufacture advanced low-profile hydraulic controls for thin-wing applications on the demonstrator project X-66 could drive future revenue growth from new aerospace technologies and projects. This could enhance revenue from aerospace segment sales, impacting overall net sales positively.
  
• Investment in Research and Development (R&D) for innovative product development, including high-temperature, robust electrical and servo-hydraulic components for next-generation aircraft engines, is likely to strengthen Woodward's competitive position in aerospace and energy markets, potentially enhancing future earnings through innovative product offerings.
  
• The focus on alternative fuel technologies, such as Power-to-X (P2X) fuels (hydrogen, ammonia, methanol), and the establishment of the P2X Research Center in Stuttgart, Germany, positions Woodward at the forefront of sustainable energy solutions. This could lead to increased demand in aviation, transportation, and power generation sectors, impacting revenue and net margins through new market penetrations and product lines.
  
• The deployment of resources and investment in rapid complex machining centers to support the supply chain recovery demonstrates operational excellence. This can improve the efficiency and reliability of Woodward's production, potentially reducing costs and improving net margins through operational improvements and enhanced supplier performance.
  
• Continuation of share repurchase programs, as evidenced by the return of $348 million to stockholders through dividends and share buybacks, signals confidence in Woodward's financial health and growth prospects. This could support EPS growth, positively affecting shareholder value and possibly indicating the stock's current undervaluation.

Assumptions

• Analysts are assuming Woodward's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.5% today to 11.7% in 3 years time.
• Analysts expect earnings to reach $444.4 million (and earnings per share of $7.33) by about November 2027, up from $372.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.1x on those 2027 earnings, up from 27.4x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 34.3x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.19%, as per the Simply Wall St company report.

Risks

• Supply chain disruptions, such as late supplier deliveries and customer pushouts, could extend the timing to collect cash on planned deliveries, potentially impacting cash flow and working capital management.
  
• Overcapacity in the U.S. domestic market, as mentioned by airlines, may lead to lower than expected demand for aerospace products, impacting revenue in the aerospace sector.
  
• The volatile nature of the China on-highway natural gas truck business, with its significant swings in demand, could lead to operational inefficiencies and fluctuating revenues impacting net margins.
  
• Dependence on the aerospace and defense market segments for aftermarket sales growth, which, if it does not materialize as expected due to industry-wide challenges, could affect overall earnings.
  
• Investments in R&D and new product development, while essential for future growth, pose a risk to short-term earnings if the market adoption of new technologies does not occur as expected or is delayed.

Valuation

• The analysts have a consensus price target of $180.31 for Woodward based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $209.0, and the most bearish reporting a price target of just $151.14.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.8 billion, earnings will come to $444.4 million, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 6.2%.
• Given the current share price of $170.85, the analyst's price target of $180.31 is 5.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.